Check out these four tricks used to get you to spend more (without you knowing it).
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If recent retirement studies are true, day-to-day expenses are keeping at least half of all American workers from saving for retirement. It’s easy to believe that statistic when you consider that we owe $987 billion in car loans alone, according to Experian Automotive.
What would happen to America’s retirement outlook if we got rid of our car payments? Is that goal even possible?
Spending More and Paying Longer
Nearly nine in 10 new cars are purchased with borrowed money. The average new car loan totals $29,550 with payments of $493 at 4.63% interest. Long gone are loan terms of three years or less. The average new car loan term is 67 months—that’s more than five and a half years! And, six- and seven-year loans now comprise 29% of purchases, making them the second most popular choice for new car buyers.
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The average new car loan totals $29,550 with payments of $493 over a 67-month term.Take a moment and put yourself in the shoes of the average car buyer. In the best-case-scenario, at the end of 67 months, you’ll have paid nearly $34,000 and have a car that’s now worth maybe $12,000. If you opt for the seven-year option, you’re out at least another $1,000 and your car is worth even less.
Human nature being what it is, you’re not as impressed with your ride as you were so many years ago. So you go out and buy another new car and the process starts all over again.
How Your Car Payment Destroys Your Retirement
This never-ending cycle means you’ve permanently dedicated a chunk of your income to car payments. But it’s not just the $500 a month in car payments that’s eating away at you. It’s the fact that you know by sending that money to the bank, you can’t use it to build up any savings for retirement—and you’re right to be concerned.
Simply put, if you didn’t have a car payment and instead invested that $500 a month in your 401(k) or Roth IRA, you could retire with more than $1 million after 30 years. That would certainly go a long way toward closing the $4 trillion retirement savings gap Americans are currently facing.
If you didn't have a car payment and instead invested that $500 a month in your 401(k) or Roth IRA, you could retire with more than $1 million after 30 years.
The good news is you can stop the car-buying cycle and start saving for retirement. It will take some sacrifice and a lot of discipline, but it’s worth it all to change your future.
Eliminate Your Car Payment Forever
Let’s say the paid-for car you’re driving now is worth $12,000. Instead of taking out another loan to buy a new car, stick with this car a little longer. Save your $500 car payment in a good money market account specifically for car replacement, and in two years, you’ll have $12,000 cash plus your trade-in to buy a nicer, new-to-you car without a loan.
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Now that you’ve learned how awesome saving money can be, you don’t mind driving your current car a little longer while your car-replacement fund grows. Keep contributing $500 to your car-replacement account for another three years, and—in less time than it would have taken you to pay off a new car loan—you could have nearly $31,000 plus your trade-in to buy a new car.
Of course you don’t have to use all of that to find another great used car, so you leave a sizeable balance in your car-replacement fund to keep growing until your next car purchase. At this point, you stop contributing to your car-replacement fund and put that $500 toward retirement instead.
Questions? Doubts? Talk With an Investing Pro to See if This Plan Can Work for You
By following this plan and staying conservative with your vehicle purchases, you can get rid of car payments forever! Then, by investing your $500 car payments in good, growth stock mutual funds, you can begin working on that million-dollar nest egg for retirement.
By following this plan and staying conservative with your vehicle purchases, you can get rid of car payments forever!
But if you’re doubtful that this plan could work for you, talk with an investing professional. Find an investing pro in your area today!